Updated from 12:50 p.m.

Yahoo!

(YHOO)

landed a solid blow Tuesday in its tangle with archrival

Google

over email dominance.

But Yahoo!'s big day was marred by difficulties users had accessing Yahoo! Mail -- problems partly induced by the company's upgrades to the service.

Following through on

plans announced a month ago at the company's analyst day, Yahoo! said it was increasing the storage capacity of both its free and premium email services.

The news is a clear response to Gmail, the free email service with a 1-gigabyte storage capacity that Google publicly launched on a test basis in early April.

Yahoo!'s Tuesday move appears to blunt the appeal of Google's offer at not too significant a cost, according to one analyst.

But Yahoo!'s new offer foreshadows perhaps years of feature wars as the two online giants fight for the attention of Internet users and investors. The move also suggests that one of the key elements factored into each company's stock price could depend on whatever mischief its rival is up to.

Google, which competes with Yahoo! in the fast-growing market of search-engine advertising, has been seen by Wall Street as the biggest threat to Yahoo!'s performance in the Internet advertising market, especially after Google completes its impending initial offering of stock to the public.

Yahoo!'s stock rose 45 cents Tuesday to close at $32.10.

Starting Tuesday, Yahoo! Mail is upping the storage capacity of new free email accounts from 4 megabytes to 100 MB. Users of premium email services -- including those who pay extra for extra capacity, or those who pay for Internet access via a Yahoo! co-branded service -- will see their storage capacity jump from a range of 25 MB to 100 MB to 2 GB, double the current capacity of the Gmail service.

"I see this as a pretty clever response on the part of Yahoo!," says Mark Mahaney, an analyst at American Technology Research. Mahaney has a buy rating on Yahoo! and a $34.50 price target.

While Yahoo! has one-upped Google with this offer, Mahaney wonders how many users will actually use the additional capacity, and he points out that it will be a gradual process for users to take advantage of the additional storage space offered them. "It takes a long time to ramp up from 10 megs to 2 gigs," says Mahaney. "They can offer you 10 gigs of storage, but there's no cost to them until you actually start using them."

In an April report, Mahaney estimated that Yahoo! would generate $40 million in revenue from premium email services from 2 million subscribers. If Yahoo! lost every one of those subscribers to Gmail, he calculated, it would mean a loss of $28 million in earnings before interest, taxes, depreciation and amortization, or 2.7% of his current annual forecast for Yahoo!'s EBITDA.

"I do find it hard to believe now, especially with this counteroffer, you're going to have a significant dropoff in premium mail subscribers," says Mahaney.

That said, Mahaney says that the email wars -- he expects that not only Google, but also

Microsoft's

(MSFT) - Get Report

Hotmail, will make some sort of capacity countermove -- will likely limit the growth in premium email service revenue for Yahoo!.

But, he says, he doesn't think premium email-growth expectations are an important element of Yahoo!'s stock price. Rather, he says, Wall Street is looking for growth in branded and search advertising, and other premium services such as Yahoo!'s co-branded Internet access service with

SBC Communications

(SBC)

.

Unfortunately for Yahoo!, access to Yahoo! Mail was problematic Tuesday.

The IDG News Service reported Tuesday that an attack on the Internet's domain name system -- a directory used to locate Web addresses -- caused disruptions Tuesday morning at Yahoo! and other sites. It wasn't clear whether the problem was specific to computers run by the Web hosting company

Akamai

(AKAM) - Get Report

or was more widespread.

Later in the day, access to Yahoo! Mail continued to be sluggish.

"There was a widespread DNS issue that may have affected numerous Internet sites and we are currently investigating its impact on our services," Yahoo! said in a statement. "Also, as we upgrade tens of millions of Yahoo! Mail accounts for consumers worldwide, some users may experience temporary fluctuation in service as we update our systems. We expect Yahoo! Mail accounts to resume to normal after upgrades are completed."

Daniel Archer, a California-based architect, complained Tuesday that he'd been having problems with his premium Yahoo! email account starting on Sunday morning. The only email he received on Monday, he reported, was a notification from Yahoo! that his account had been temporarily disabled because he had exceeded his storage quota "by a very large amount." The warning email Archer forwarded to

TheStreet.com

read, "You are only allowed -2048.0MB of storage but you are currently using 0.0MB of storage."